National judges must in certain circumstances set aside final judgments in order to prevent illegal State aid

National judges must in certain circumstances set aside final judgments in order to prevent illegal State aid

On 11 November 2015, the Court of Justice ruled that national judges should, in certain circumstances, depart from a final judgment in order to prevent the granting of illegal State aid. This means that the national rules that oblige judges to respect the final decision reached in earlier proceedings between the same parties (also known as res judicata), cannot provide absolute certainty to parties that conduct business with EU Member State entities.

Facts

The case concerned wood supply agreements between the Klausner Group and the German Forestry Administration of the Land Nordrhein-Westfalen ("Land"). The Land decided to rescind the contracts in 2009 after issues arose between the parties. The Klausner Group sued the Land, and in 2012 ultimately won a declaratory judgment by the Higher Regional Court of Hamm ruling that the supply agreements should remain in force. This judgment became final.

In a subsequent set of proceedings the Klausner Group sought damages from the Land. The Land, in its turn, argued that EU law would preclude the execution of the wood supply contracts because they would amount to illegal State aid. In this case, the Court sided with the Land and found that the contracts would indeed amount to State aid. However, the Court considered that it could not rule against the final judgment of the Higher Court. Within this context, the Court requested a preliminary ruling from the Court of Justice on how to solve this conflict between legal norms.

The Court of Justice judgment

The Court of Justice emphasized that national judges should interpret national law in conformity with EU law. This means that rules of national law must not be framed in a way that makes it impossible or excessively difficult to exercise the rights conferred by EU law (principle of effectiveness).

Subsequently, the Court of Justice considered: "[…] that both the State authorities and the recipients of State aid would be able to circumvent the prohibition laid down in the third sentence of Article 108(3) TFEU by obtaining, without relying on EU law on State aid, a declaratory judgment whose effect would enable them, definitively, to continue to implement the aid in question over a number of years."

The judgment thus concludes that the principle of res judicata, in this case, given that the final judgment did not examine the conformity of the contracts with State aid rules, is contrary to the principle of effectiveness as it would prevent national courts from applying the State aid rules.

Conclusion

Although the supremacy of EU law as such is not new, this ruling shows that it remains a topic to be considered in national proceedings. As a consequence of this ruling it is clear that a final judgment (that does not explicitly concern legal issues relating to State aid) does not provide undertakings with full legal certainty. This is relevant since State aid rules are often invoked by the government. Parties that conclude contracts with government entities should be aware of this development, and consider developing contractual provisions that serve to protect them in case the State aid rules are raised.

This article was published in the Competition Law Newsletter of December 2015. Other articles in this newsletter:

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